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spk00: Thank you for joining us today to discuss Maxtalk's first quarter 2022 results. On the call today are Talia Sesser, Chief Corporate Development and Investor Relations Officer, and Nir Dagan, Chief Financial Officer. At this time, all participants are in listen-only mode. Following the presentation, we'll conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. It should be emphasized that during this call, the management team will present the first quarter 2022 results and other information as presented in the investor presentation, and that information includes forward-looking information as defined under the Securities Law 5728-1968. The forward-looking information includes forecasts, projections, estimates, or other information which refer to a future event or matter, the event duration of which is uncertain or not within the company's control. The forward-looking information is based on the current information held by the company or its current adjustments. With that, I'll turn the floor over to Talia Sesser.
spk02: Thank you, Rob. Good morning and good afternoon, everyone, and thank you for joining us today. With me on the call today is Nir Dagan, our Chief Financial Officer. As in the previous quarter, earlier today we had an earning call with our Israeli investors, and Ori presented a meaningful amount of the call. Here, again, due to language barriers, I will be doing the first part of the presentation, and Nir will be presenting a deeper dive on our financials. Before we start, as a reminder, there is a presentation accompanying today's prepared remarks. The slides are viewable through the webcast link located under the events section on our IR website. On slide number two, you see our disclaimer. This is our standard disclaimer language, which I think everyone is familiar with. On slide number three, for those of you who do not know MaxTalk, we are Israel's leading extreme value retailer, much like Dollar General is in the U.S. and B&M is in the U.K. We offer a broad assortment of quality products for customers' everyday needs at affordable prices. On slide number four, we turn now to our first quarter results. As you can see, we achieved revenue largely in line with the first quarter last year, along with a strong operating cash flow. Our revenue remains flat thanks to the opening of new branches, which added roughly 10,000 net square meters to our store base and covered for the decline in our same store sales. Passover is a significant holiday in Israel, and the timing of the holiday this year was a main contributor to our 10% decline in same-store sales. We're proud of our team that did an excellent job procuring inventory and achieving gross margins of 39%, despite logistics cost pressures. However, labor costs were up this quarter and negatively impacted our EBITDA and net income margins. We are watching it carefully and believe we can improve it over time, implementing various measures that Nir will detail later on in the presentation. To really appreciate the revenue growth trajectory we've been able to achieve through the volatile pandemic period, I think it is important to note that we delivered a three-year compound annual growth rate of 13% from the pre-pandemic first quarter of 2019. through the first quarter of 2022. This performance, through an incredibly difficult period, highlights the progress we have made, expanding our footprint in Israel and strengthening our position as Israel's leading extreme value retailer. The current environment may also create new opportunities for us. We currently see some opportunities for us in procuring inventory at lower prices, in securing long-term leases contracts, at favorable terms. We see some moderation in shipping costs, and many travel restrictions imposed due to COVID are now lifted. These are all good news for us. Finally, the Israeli government recently announced a plan to address the rising cost of living in Israel, which will include a suite of measures, including a reduction of tariff on multiple imported products, effective in mid-May, and including various household goods, fast-moving consumer goods, and furniture on which the typical custom is roughly 12%. This is applicable for us at Maxtalk, and roughly 90% of our products could benefit from this custom relief. This is a short-term measure, which is effective for the next several months until the end of this year. On slide number five, shifting focus now to our balance sheet as of quarter end, we generated healthy cash flows in Q2, sorry, in Q1 2022, 24 million versus 40 million for full fiscal year 2021, a negative cash flow of 18 million in the prior quarter Q1 2021. Overall, we have ample liquidity with about $60 million in cash to ensure financial flexibility and to support future expansion of activities. Our debt levels are modest with total debt at quarter end of about $78 million. These figures are following a $10 million investment in CapEx mainly related to our new stores investments that I'll detail later on. Regarding our inventory position, inventory at quarter end were about 220 million compared with 240 million at year end and 164 million in Q1 2021. We do not anticipate any further significant building of inventory and expect inventory levels to remain stable at current levels and even slightly go down. On slide number six, as you can see, we saw top-line expansion across all of our categories except for housewares this quarter. The houseware category was negatively impacted by the timing of Passover. We expect to see a rebound in this category, which is our largest one, next quarter, that should offset this timing-related contraction. the double-digit growth that we saw in four of our six largest categories in consumables, in arts and crafts, office and school supplies, and apparel basics. On slide number eight, as you know, store expansion is integral to Max Store growth story. We've said in the past that we see at least one Max Store per city with 30,000 people or more. On slide number eight, you can see our store in Nahariya, located in the northwestern district of Israel. Nahariya's population alone is roughly 58,000, but the store can actually serve the neighboring towns, such as Acre, that has a population of almost 50,000 people as well. The store in Nahariya was opened in February this year and stands 2,800 net square meters. On slide number nine, the second successful store opening in Q1 was Nofagalil in March this year. This store is 2,200 net square meters in size. Again, this is also located in the north part of Israel and also a max big box concept. We see very positive initial performance from both stores. On slide number 10, looking ahead, we plan to open another store, a 4,100 net square meter store in Kfar Saba. This store is located in the center of Israel, northeast of Tel Aviv. The store is expected to be open in the second half of this year and will replace an existing store in an adjacent location. such that the net addition to square meter is roughly 2,900 square meters. Kfar Saba is also a large city, and the population there, just Kfar Saba alone, is 110,000 people, so definitely a store that could serve a significant number of people in the area. On slide number 11, we've also signed a contract for a new store in Beirut Yitzchak. This store is in central Israel. And again, a store that could serve a population of Kiryat Ono and Yehud. Both these cities are together roughly 70,000 people. And there are additional towns in the area that could also come to the store. So We think that the location there is a very good one. On slide number 12, as we said in the past, our goal is to double our net square meters footprint from approximately 40,000 square meters that we had at the end of 2019 to 80,000. And that should be done over the next two to three years. Today, we are approximately at 55,000 square meters, and we expect to be at approximately 60,000 by year end. We continue to see a significant white space opportunity for additional stores over time. On slide number 13, we wanted to illustrate how under-penetrated Israel is compared to the U.S. in terms of discount stores per capita. While we do not expect our whole market to achieve parity with the U.S., we do see a wide delta that adds to our confidence that we can certainly double our footprint in Israel and potentially even more. What you can see in this slide is that the U.S. has almost four times dollar stores per capita versus Israel. And even in the U.S., this dollar store category is still underpenetrated. Slide number 14, in addition to store expansion opportunities, there is plenty to be positive about, even as the economic outlook remains uncertain. And we wanted to highlight a number of counter-cyclical attributes in our model that typically enables continued strength through difficult operating environments. The first one is our sourcing model that allows us to offer products at great prices The second one is that we generate the bulk of our revenue from non-discretionary everyday essentials. They account for roughly 60% of our revenue. And finally, our partner manager model enables us to tightly manage expenses. While Israel is facing some of the same economic pressures as the U.S., namely inflation and rising interest rates, The economy here is so far showing good resilience in the face of such headwinds. With that, I'll turn the floor over to Nir to go through Q1 2022 numbers in detail. Nir.
spk07: Thanks, Talia. It is a pleasure to be speaking with you today. Slide 16.
spk01: Starting with our first quarter result, total revenue for the... this quarter was almost the same as the same first quarter of 2021. The minor decrease was driven primarily by difference in timing of Passover holiday, which happened in the first quarter last year, and in the second quarter this year, offset by sales from new stores. When compared to pre-pandemic first quarter of 2019, revenue grew by 44%. Gross margin was 39% down just 60 basis points versus 2021 despite the disruption of the global supply chain and increased trade costs. Adjusted EBITDA pre-IFRS 16 was down 25.1% compared to last year when we increased our adjusted EBITDA by over 73%. When compared to first quarter of 2019, we grew adjusted EBITDA by 36%. Adjusted EPS was 0.13, a decrease of 32% compared to last year, but up 30% when compared to first quarter of 2019. Slide 17. Next. is the bridge for the changes in revenue that I just described. Growth from new stores and royalties was offset by lower franchise fees and decline in same-store sales grew both due to the timing of Passover, leading to overall flat revenue when compared to a year ago.
spk07: Slide 18.
spk01: Here is a similar bridge showing the drivers for the decline in adjusted EBITDA this quarter. An increase in OPEX of 5.3 million driven primarily by higher selling and marketing expenses due to increase in salary and wage expenses, rent, municipal taxes, and branch maintenance. 2.8 million in cost associated with the ramp-up of new stores and $2.4 million in higher logistic costs. When compared to a more normal operating environment in 2019, we grew adjusted EBITDA by 36%. As some of the headwinds of 2022 moderate, we continue to believe in our ability to deliver long-term margin expansion. Slide 19. In order to compare our result on a more long-term basis excluding quarter to quarter volatility i also want to briefly walk through our result on trading of 12 months basis first our store expansion of earth continued to accelerate as net square meters have grown to 54.8 up from 49.8 million at year end 21, with the opening of two new stalls, as Talia mentioned earlier. Total revenue over the last 12 months is relatively flat when compared to full year of 21 at $975.2 million. Despite lower margin largely due to disruption of the global supply chain and increased break-off, Gross profit over the last 20 months was 377.3 million, relatively flat compared to full year of 21. Now I'll return the call back to Talia.
spk02: Thank you, Nir. We are one of Israel's favorite brands. We are profitable, cash-generative business. We capture elements of best-in-class players globally, and we are counter-cyclical in nature. This is why, despite the current headwinds, which we do not take lightly, we still remain confident in our longer-term goals. We look forward to offering great value for both our customers and shareholders as we continue to execute on our long-term strategy this year. Operator, we are now ready to take any questions.
spk00: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
spk07: One moment, please, while we poll for questions. Our first question is from the line of Corey Tarnlow with Jefferies.
spk00: Please proceed with your question.
spk06: I tell you, I need your help. You're both doing well. And thank you for taking my questions. Can you talk a little, hi, can you talk a little bit more about the health of the Israeli consumer and remind us of the tailwinds and headwinds this consumer is facing ahead and how you're planning the business as a result?
spk02: Sure. Overall, Israel is in a better position versus the U.S. We don't see a recession here. There are some inflationary pressures lower than those in the U.S. We are around 4% in terms of inflation rate. There is some softness in demand, but as we mentioned earlier, we think that because of our counter-cyclical attributes, we can actually benefit from this. from this environment. Also, I would highlight that despite some current headwinds, as I mentioned earlier in the call, there are some positive things that are starting to happen gradually. Shipping costs are going down. We see some opportunities in terms of finding long-term lease contracts that are favorable to us. and various other things that could be offsetting the minor softness that we've seen in the consumer in Israel. But overall, we see some softness, but nothing major, I would say.
spk05: Got it. Any progress on international expansion initiatives that you can update us on?
spk02: We don't have anything to update on. So, you know, we've announced last quarter that we signed an initial MOU regarding a potential expansion to Portugal and Spain. We're still working on final agreement and on a full business plan. And once we have something to update, we'll certainly announce it and discuss it with you.
spk05: Got it. And then lastly, can you just quantify the Passover sales shift?
spk02: Yes. We were debating whether to normalize it to you guys or not, and we decided actually not to quantify it. I would just say that even without Passover, we would not have a positive same-store sales growth. However, the decline of 10% would not be as strong. It would be significantly lower. It is a very significant holiday in Israel, and as you saw, our largest category, our household category, was negatively impacted by the timing of the holiday. Also, in terms of expenses, you know, we had to prepare the stores and had to invest many costs in order to be ready for the holiday, and the fruit is actually generated only in the second quarter. I know that, well, I don't know how many Israeli companies you are actually covering, but all the retailers in Israel, pretty much 99% of them were negatively impacted by the Passover holiday, and everyone was quoting Passover as a main reason for the decline year over year.
spk07: Understood. Thank you very much and best of luck.
spk04: Sure. Talia, there's a question that came in via the webcast from Douglas Turnbull at Invesco. His question is, could you give us a bit more color on how you're able to offset some of the operating expenses increased that are dragging on EBITDA?
spk02: Yes, sure. So, listen, this is first a reflection of lower sales per square meter. Once we get that right, back on track, operating expenses will get corrected as well. Now, should we see that this is not happening and we don't see any reason to think that this is going to happen. But if, you know, we see persistent lower sales per square meter, then we can adjust our operating expenses. The first thing is, you know, salaries for revenue, the percent of salaries of revenue can significantly go down if we have lower sales per square meters on an ongoing basis. That is an adjustment we can do. in order to adjust our operating expenses to the right level of sales. That is one major element, I think, which is the largest one.
spk04: And then just a follow-up, Douglas. I know you didn't quantify the sales shift from Passover, but I'm assuming the shift also had an appreciable impact on EBITDA margin as well? Maybe just
spk02: confirm and then provide any color yes yes exactly so um as i said earlier the the impact of the holiday was both on top line and on the operating expenses so on one hand uh we had lower sales per square meters because we did not have the full impact of uh the the holiday particularly in our household category uh you know this um You can also see it in our basket size, by the way. It went down by 3%. Also a reflection of the timing of the holiday because Passover tickets tend to be higher in size. So that's the first element of it. The other side is that you need to get the stores ready for the holidays. So you have to make sure you have all the inventory in place. that everything is prepared for the right season, and this labor is an extra cost on top of the normalized level of labor costs. So it's like both things working not in the right direction, and we expect to see a reversal of this trend in Q2.
spk07: Thank you.
spk00: The next question is from the line of Tan Van with Lazard Investors. Please proceed with your question.
spk03: Talia, thanks for taking my question. I had three questions, but maybe we can start with a cash flow. I did not catch your comments on the strong cash flow. Could you give me a little bit more narrative behind the cash flow information?
spk02: Sure, Tam, and great to speak with you today. The main difference in the cash flow this quarter versus Q1 2021 was inventory. So we were stocking up on inventory last quarter. We were building a higher level of inventories due to the pandemic and our intention to make sure that we do not fall short in inventory. Now inventory level stabilized. and we did not have to invest in working capital, which enabled us to benefit from strong operating cash flow this quarter.
spk03: Gotcha. Understood. Did you give a number on the cash flow? I don't think I caught that part of the presentation.
spk02: Yes. We have one second, or we can repeat that. Our cash flow, operating cash flow this quarter were $24 million. For full year 2021, operating cash flows were $40. And in Q1 2021, cash flow from operating activities was negative $18 million.
spk03: Gotcha. Understood. Thanks for that. And maybe on the follow-up question with the inventory is that you mentioned shipping costs going down. which is very positive, but it's 50% of inventory of your costs coming from overseas. How do you see the availability of those inventory versus historical trend? How fast can you procure them? Do you see any problem stocking a shelf? Yes, sure.
spk02: So, roughly speaking, we can increase imports up to 70% of our total inventory. Currently, it's roughly 50-50 right now. And that can also have a positive impact on our gross margin. Now, with various countries overseas, starting to open gradually, many places in Europe. Also, there are some initial positive signs in China. So these are all very good news for us. And we can increase our inventory from imports and potentially also see some benefit in gross margin. I mean, this is too early to predict, but overall, both shipping costs and the fact that various countries have, yes, have moderated their restrictions in terms of travel restrictions imposed due to COVID. The fact that they are now lifted is a good thing for us. And the other thing that I may have not emphasized enough, although this is a short-term benefit, is the custom relief that we have up to the end of this year Again, about 90% of our products are now eligible for a custom relief or tariff relief. We pay anywhere between 6% and even above 20% of custom on various imported goods. The typical custom is 12%. And now, as the government wants to support customers and also help reduce the cost of living in Israel, they announced relief in this custom up to the end of this year.
spk03: Gotcha. Thanks so much. Maybe the last question I have is SG&A growth. You mentioned the inflation rate is currently running at 4% right now. do you expect this inflationary pressure on the operating expense to increase in the near term? Just because I think right now inflation is running hotter than it was in fall 2021. So I think the future costs should only increase. Is that a fair statement?
spk02: There are some items in our P&L that are linked to inflation. Others are fixed, at least in the short term. The rent is overall fixed. There is a minor element in rent that is linked to inflation. But overall, we don't see a major impact from inflation, at least not in the next quarter.
spk03: Got you.
spk08: Understood.
spk00: Okay.
spk08: Thank you.
spk02: Okay. Thank you.
spk00: Thank you. At this time, we've reached the end of the question and answer session. I'll turn the call over to Talia Sessor for closing remarks.
spk02: Okay, guys. Thank you very much for joining us today. We look forward to continuing the dialogue with you and to working with you and to help you resolve any questions that you have. please feel free to contact me via cell phone or email or near. We'll be happy to answer any further questions that you have and wishing you all a great day. Thank you.
spk00: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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